Warning

 

Close

Confirm Action

Are you sure you wish to do this?

Confirm Cancel
BCM
User Panel

Arrow Left Previous Page
Page / 2
Posted: 7/18/2017 10:03:50 PM EDT
When I was in the .mil, I used Roth because I have 4 kids, wife doesn't work and lots of my income was not taxed.

Now I am making a lot more in the taxable income and my AGI is north of 100K.  I am still maxing out my wife's and my Roth and putting another 10K in a 401K with pre-tax money.  I was wondering if putting more in the 401K would be smart now to drive down my taxable income.  My combined roths are about 300K right now (of course the market is on fire and everyone is a genius) so the 10K a year isn't the main contribution.

what say the hive?
Link Posted: 7/18/2017 10:13:02 PM EDT
[#1]
Are you in a position financially to do a max contribution ($18k) at work, as well as both Roths?

If so, then do both.

You're doing good. Don't listen to us clowns on here, or you'll end up with a 30yr mortgage and an 84 month loan on your truck.
Link Posted: 7/18/2017 10:18:26 PM EDT
[#2]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Are you in a position financially to do a max contribution ($18k) at work, as well as both Roths?

If so, then do both.

You're doing good. Don't listen to us clowns on here, or you'll end up with a 30yr mortgage and an 84 month loan on your truck.
View Quote
No, I can't do both.  I am putting away 20K total right now, evenly mixed.  I have some money now and enjoy it.

And I have a 30 year mortgage as of last year.

3.25, so not too bad.  I'd rather take the market returns and the tax deduction over paying off the mortgage early.
Link Posted: 7/18/2017 10:36:48 PM EDT
[#3]
Since your wife doesn't have another retirement account besides her Roth, I'd max it for her, and contribute the rest to your 401k.

I thought 401k is limited to $18k contribution annually?
Link Posted: 7/18/2017 10:50:53 PM EDT
[#4]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Since your wife doesn't have another retirement account besides her Roth, I'd max it for her, and contribute the rest to your 401k.

I thought 401k is limited to $18k contribution annually?
View Quote
I may be screwing up but its 5500 to both me and the wife's Roth and then 10K to my 401K.  Is that a problem?

I don't really know.
Link Posted: 7/18/2017 11:09:04 PM EDT
[#5]
I prefer to max the Roth IRA's as I'm self employed, and then wife contributes what we are comfortable with towards the 401k's. I'm pretty happy with the arrangement.
Link Posted: 7/18/2017 11:09:31 PM EDT
[#6]
401(k) to % of employer match then Roth IRA $5500 / year for each of you if you're under age 50 and the income limit.
Link Posted: 7/18/2017 11:12:03 PM EDT
[#7]
You can contribute up to $18k annually to your 401k.

With the Roth, $5,500 for you, $5,500 for your wife. Don't forget that if you're 50+, you can do up to $6,500 each.

With four kids, you probably want to relax a little on retirement contributions if you can I'd imagine. How old are you and your wife?
Link Posted: 7/18/2017 11:14:24 PM EDT
[#8]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I prefer to max the Roth IRA's as I'm self employed, and then wife contributes what we are comfortable with towards the 401k's. I'm pretty happy with the arrangement.
View Quote
Don't forget, since you're self-employed, you can do a SEP IRA. You can do up to 25% of your salary, or $54,000 for 2017.
Link Posted: 7/19/2017 3:43:22 AM EDT
[#9]
There is almost no reason not to go Roth...you'll pay a little up front and never pay taxes on the earnings = much larger savings than a few thousand each year.
Link Posted: 7/19/2017 7:47:04 AM EDT
[#10]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
There is almost no reason not to go Roth...you'll pay a little up front and never pay taxes on the earnings = much larger savings than a few thousand each year.
View Quote

My ROR assumption is 8%.  I am paying 25% on my top end earnings.  So if I use pre-tax money, I am saving the 25% hit on my top end.  

Hence the question.
Link Posted: 7/19/2017 10:32:48 AM EDT
[#11]
Where are you on the income scale?
Link Posted: 7/19/2017 10:52:40 AM EDT
[#12]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
My ROR assumption is 8%.  I am paying 25% on my top end earnings.  So if I use pre-tax money, I am saving the 25% hit on my top end.  

Hence the question.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
There is almost no reason not to go Roth...you'll pay a little up front and never pay taxes on the earnings = much larger savings than a few thousand each year.
My ROR assumption is 8%.  I am paying 25% on my top end earnings.  So if I use pre-tax money, I am saving the 25% hit on my top end.  

Hence the question.
Answer remains the same.

A few decades from now you'll have way more than you ever contributed which, in a Roth, will be untaxed.

Maxing the Roth is almost always the answer unless you're not eligible.
Link Posted: 7/19/2017 11:03:51 AM EDT
[#13]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


Answer remains the same.

A few decades from now you'll have way more than you ever contributed which, in a Roth, will be untaxed.

Maxing the Roth is almost always the answer unless you're not eligible.
View Quote


but when I retire I doubt I will have the AGI I have now.  Assuming tax rates don't change massively (and that the law doesn't change fucking over people with Roth IRAs (which wouldn't surprise me at all)) I will pay a lower tax rate in the future than I would pay now.

simple math.

I am putting 10k in roth each year.  That is 2500 I am paying in taxes on that money right now every year.  That is over the next 20 years 50,000 I am paying in taxes.

Will the tax savings on the back end when I withdraw (if I do, I may give to my kids/grand kids) match what I could have done with that 50K?  figure 8% on that money would be about 100K if I invested properly.
Link Posted: 7/19/2017 11:04:10 AM EDT
[#14]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Where are you on the income scale?
View Quote


over 100K AGI.
Link Posted: 7/19/2017 11:38:54 AM EDT
[#15]
How old are you, and your wife?
Link Posted: 7/19/2017 12:28:29 PM EDT
[#16]
Mid 40s
Link Posted: 7/19/2017 12:54:30 PM EDT
[#17]
Here's what I would do.

Allocate 15% of your income towards retirement.

Contribute up to the company match on your 401k, max out both Roth IRAs. Anything left over, top off the 401k.
Link Posted: 7/19/2017 1:07:58 PM EDT
[#18]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Here's what I would do.

Allocate 15% of your income towards retirement.

Contribute up to the company match on your 401k, max out both Roth IRAs. Anything left over, top off the 401k.
View Quote


that's where I am at right now.  Just hate taking that 25% hit on the top end.  I am giving away 2500 a year now for future tax deferement.
Link Posted: 7/19/2017 1:40:29 PM EDT
[#19]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
that's where I am at right now.  Just hate taking that 25% hit on the top end.  I am giving away 2500 a year now for future tax deferement.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Here's what I would do.

Allocate 15% of your income towards retirement.

Contribute up to the company match on your 401k, max out both Roth IRAs. Anything left over, top off the 401k.
that's where I am at right now.  Just hate taking that 25% hit on the top end.  I am giving away 2500 a year now for future tax deferement.
We all hate taking the 25% (or whatever) hit, but I'd much rather pay whatever of $18,000 ($24,000 in my case)every year than 35% of a couple mil.  Look at it as a way of budgeting your taxes over your working lifetime rather than your withdrawing lifetime.  Most people don't realize the huge tax liability they have "worked" to build up in their traditional 401(k)s and IRAs.

I just throwing some SWAG #s out, so don't "ARCOM literalize me", but a few decades from now you could be sitting on a couple of million, of which, a few hundred thousand was your contribution.

Which would you rather pay taxes on, a few hundred thou (over 30 or 40 years) or a few million (over 20-30 years)?

IOW, you could have a few million which is mostly yours tax free, or a few million of which, only 75% is yours.  Of course, when you start RMDing a couple hundred thou a year your tax rate will probably be higher than 25%, so two/thirds of it is actually yours.

Contribute the min 401(k) to max company contribution; max the Roth(s) if you can.
Link Posted: 7/19/2017 1:44:20 PM EDT
[#20]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


We all hate taking the 25% (or whatever) hit, but I'd much rather pay whatever of $18,000 ($24,000 in my case)every year than 35% of a couple mil.  Look at it as a way of budgeting your taxes over your working lifetime rather than your withdrawing lifetime.  Most people don't realize the huge tax liability they have "worked" to build up in their traditional 401(k)s and IRAs.

I just throwing some SWAG #s out, so don't "ARCOM literalize me", but a few decades from now you could be sitting on a couple of million, of which, a few hundred thousand was your contribution.

Which would you rather pay taxes on, a few hundred thou (over 30 or 40 years) or a few million (over 20-30 years)?

IOW, you could have a few million which is mostly yours tax free, or a few million of which, only 75% is yours.  Of course, when you start RMDing a couple hundred thou a year your tax rate will probably be higher than 25%, so two/thirds of it is actually yours.

Contribute the min 401(k) to max company contribution; max the Roth(s) if you can.
View Quote


My plan doesn't have me at more than a million unless the markets go crazy/inflation makes that number irrelevant.
Link Posted: 7/19/2017 2:30:27 PM EDT
[#21]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


My plan doesn't have me at more than a million unless the markets go crazy/inflation makes that number irrelevant.
View Quote
You'd be surprised:  your $18,000 contributions for 20 years = $360k principle; total after 20 years ~$1M total.

So reduce by an order of magnitude; concept still valid.

I forgot to mention the 0.9% Medicare Surcharge and the 3.8% Net Investment Income Tax...they too come off the top when you file (both courtesy of 0bamacare) so even less of what you think is yours, is really yours (to keep).
Link Posted: 7/19/2017 2:30:41 PM EDT
[#22]
How long do you see yourself being with your employer? When you leave, you could roll the 401k into a Roth. Taxes will be due though on the pre-tax contributions.

The plus side of the Roth, expands your investment options, no RMDs are required for you, ever. When you die, it can transfer to your wife and keep growing.
Link Posted: 7/19/2017 4:14:56 PM EDT
[#23]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
but when I retire I doubt I will have the AGI I have now.  Assuming tax rates don't change massively (and that the law doesn't change fucking over people with Roth IRAs (which wouldn't surprise me at all)) I will pay a lower tax rate in the future than I would pay now.

simple math.

I am putting 10k in roth each year.  That is 2500 I am paying in taxes on that money right now every year.  That is over the next 20 years 50,000 I am paying in taxes.

Will the tax savings on the back end when I withdraw (if I do, I may give to my kids/grand kids) match what I could have done with that 50K?  figure 8% on that money would be about 100K if I invested properly.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Answer remains the same.

A few decades from now you'll have way more than you ever contributed which, in a Roth, will be untaxed.

Maxing the Roth is almost always the answer unless you're not eligible.
but when I retire I doubt I will have the AGI I have now.  Assuming tax rates don't change massively (and that the law doesn't change fucking over people with Roth IRAs (which wouldn't surprise me at all)) I will pay a lower tax rate in the future than I would pay now.

simple math.

I am putting 10k in roth each year.  That is 2500 I am paying in taxes on that money right now every year.  That is over the next 20 years 50,000 I am paying in taxes.

Will the tax savings on the back end when I withdraw (if I do, I may give to my kids/grand kids) match what I could have done with that 50K?  figure 8% on that money would be about 100K if I invested properly.
First, if you're in the 25% tax bracket (look at the link and find the bracket based on your income and filing situation), will you ever actually drop out of it in retirement? For instance, I'm young (27) and in the upper end of the filing single 25% bracket. If I never get married, I'll probably never fall below the 25% bracket even in retirement. In this case, Roth looks good. However, if I get married, I'd still be in the 25% bracket, but now I'm at the low end of the filing jointly 25% bracket. It's conceivable that if I'm married and we go into retirement debt free, that our income will be low enough that we'd drop to the 15% bracket. In this case, I'd pay a lower percentage tax on withdrawals than I did on contributions. However, you need to consider time in the market and doubling your investments every 10 years on average. Then, by 60 I'll have eight times what I had invested by 30. I'd rather pay the 25% on the eighth I invested than the 15% on the whole amount. On the other hand, if I switch to traditional, I could theoretically contribute more into my 401k because it is pre-tax and the money taken out each paycheck for taxes on the Roth could be spent investing in the traditional 401K pre-tax.

Also, if you're truly contributing $10k to a Roth each year, that's actually costing you $13.3k. That's because the the Roth is post-tax at 25% tax rate. 75% of $13.3k gives you $10k to invest post-tax.
Link Posted: 7/19/2017 5:12:19 PM EDT
[#24]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I'd rather pay the 25% on the eighth I invested than the 15% on the whole amount.
View Quote
Never thought of it that way.


Thanks for the great post.
Link Posted: 7/19/2017 9:59:25 PM EDT
[#25]
I am a huge fan of the Roth kill the tax man if you can.  But I sat in on a cains,waters, and associates lecture that was very informative.  It said to have both.  Pull the 401k money and stay in the lowest tax bracket possible and Roth for anything over.  It was a specific formula that I don't have and the lecture was toward dentists.
Link Posted: 7/19/2017 10:34:20 PM EDT
[#26]
All it takes is a couple good picks in your Roth and you're golden. I sold some of my earlier stocks for profit (tax free), banked away some cash plus my contribution and then got in on this little IPO called Facebook. Also was an early investor in AMZN and NFLX.
Link Posted: 7/19/2017 11:26:18 PM EDT
[#27]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
There is almost no reason not to go Roth...you'll pay a little up front and never pay taxes on the earnings = much larger savings than a few thousand each year.
View Quote
It depends on how close you are to retirement. The closer you are, the more beneficial a traditional is. Why pay an additional 20% on taxes with a roth when you can defer it for a few years and pay only 15% on it in retirement?
Link Posted: 7/19/2017 11:27:57 PM EDT
[#28]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
All it takes is a couple good picks in your Roth and you're golden. I sold some of my earlier stocks for profit (tax free), banked away some cash plus my contribution and then got in on this little IPO called Facebook. Also was an early investor in AMZN and NFLX.
View Quote
Yep...that's how it works, that and time.
Link Posted: 7/19/2017 11:37:02 PM EDT
[#29]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
It depends on how close you are to retirement. The closer you are, the more beneficial a traditional is. Why pay an additional 20% on taxes with a roth when you can defer it for a few years and pay only 15% on it in retirement?
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
There is almost no reason not to go Roth...you'll pay a little up front and never pay taxes on the earnings = much larger savings than a few thousand each year.
It depends on how close you are to retirement. The closer you are, the more beneficial a traditional is. Why pay an additional 20% on taxes with a roth when you can defer it for a few years and pay only 15% on it in retirement?
Nope, it depends only on how old you are:  it only takes a few years for the benefit of never paying taxes to outweigh paying them upfront.

Additionally, you are assuming you will be paying less in retirement* and OP doesn't sound like he's anywhere near retirement so moot point.

* RMDs mandate that you empty your tax deferred accounts in about 30 years (currently); you may find that, you are forced to withdraw substantial amounts which, combined with pension(s), SS, etc. leave you in the same or higher bracket plus one never knows where tax rates will be in the future.
Link Posted: 7/19/2017 11:44:02 PM EDT
[#30]
Amazing how we worry about retirement, and there are 25 year old, able bodied men and women, already living the retired lifestyle.

Course they're all in the ghetto,  us free phone plan, $10/month wifi thru Uverse, reduced utilities, and EBT.
Link Posted: 7/20/2017 3:37:41 AM EDT
[#31]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Amazing how we worry about retirement, and there are 25 year old, able bodied men and women, already living the retired lifestyle.

Course they're all in the ghetto,  us free phone plan, $10/month wifi thru Uverse, reduced utilities, and EBT.
View Quote
Yep.

Even if they get a lot of stuff for free, it amazes me how many people are satisfied with living at that level/lifestyle/like that.
Link Posted: 7/20/2017 8:09:06 AM EDT
[#32]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
All it takes is a couple good picks in your Roth and you're golden. I sold some of my earlier stocks for profit (tax free), banked away some cash plus my contribution and then got in on this little IPO called Facebook. Also was an early investor in AMZN and NFLX.
View Quote


I don't pick.

Just SP 500 index.
Link Posted: 7/20/2017 9:04:59 AM EDT
[#33]
You can avoid RMD through a life policy.

You can defer taxes with a life policy.

You can structure tax free withdrawal with a life policy.

Your gains won't be as good with a life policy.

You do have a death benefit if you die with a life policy.

You can get garaunteed returns but there is a potential opportunity loss with a life policy.

A life policy can be another bucket you use for retirement.
Link Posted: 7/20/2017 11:19:15 AM EDT
[#34]
both my parents are alive and they have lived waaaaaaaaaaaaaaaaaaaaaay more unhealthy than I do.

I am going to carry a term life out till 70 ( I roll over a few every 10-20 years) or until I am about 1.5M in total assets.  I have 4 kids.  My wife won't be destitute regardless.

About the only thing I have done right in my investing is not falling for the whole life policy in my 20s.
Link Posted: 7/20/2017 11:34:26 AM EDT
[#35]
Did someone really just come in here and say a whole life policy is an "investment"?

Link Posted: 7/20/2017 11:48:25 AM EDT
[#36]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Did someone really just come in here and say a whole life policy is an "investment"?

View Quote


I wasn't sure if he was a salesman, a troll, or high.
Link Posted: 7/20/2017 11:59:41 AM EDT
[#37]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I wasn't sure if he was a salesman, a troll, or high.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Did someone really just come in here and say a whole life policy is an "investment"?

I wasn't sure if he was a salesman, a troll, or high.
Never used word investment.

Is it the best? No. Did I say it was? No. Is it an option? Yes.
Link Posted: 7/20/2017 12:04:02 PM EDT
[#38]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


Never used word investment.

Is it the best? No. Did I say it was? No. Is it an option? Yes.
View Quote


So is buying lotto tickets.

At least with the lotto I have a chance at a positive RoR
Link Posted: 7/20/2017 12:59:35 PM EDT
[#39]
Max out the Roth.

I'm assuming you will be/are receiving military retirement pay, which is taxable by the Feds and most states.  Any 401k or IRA withdrawals will add to your tax exposure unless its from a Roth.

You can also take out Roth contributions (not returns or growth) without penalty prior to age 59.5.

And... Beat Navy!!! (USMA '90, D3)
Link Posted: 7/20/2017 1:18:12 PM EDT
[#40]
I'll give you a bit of different advice. It sounds like you have a great plan to move forward....But where are you moving to? Let me relate a little story.

I have a buddy whos father loved to fish. That was his passion. Fishing. He lived frugally and retired pretty well off. For his retirement present he went out and bought himself some updated fishing gear and got all set to enjoy retirement. My buddy laughed and told his dad "You could have done that years ago...."

OK, story time is over. So how does it apply? Well, what are your retirement goals? You should match your contributions to meet your goals, not just slam as much into retirement as you can. I mean its not a bad idea, but heres a made-up-on-the-spot example.

Lets say you live frugally, dont take big vacations and buy used cars so you can save bunches of money. Then you retire and you realize fuckin hell you have more money than you'll ever spend. Well, you could have trimmed back the contributions decades ago and taken a once a year nice vacation somewhere exotic or bought a news car.

The point is you are looking at it only from how you can change your tax brackets. Might be worth considering where your varying levels of contributions are going to take you....If I had to choose between living frugally and having more than I'd ever need in retirement or living well and having a bit more than I expected in retirement I'd take the latter option.

Worth what you paid for it, and its certainly not suggesting you shouldnt contribute a healthy amount into retirement accounts! That said, I prefer Roth as much as possible because fuck taxes on my retirement income streams.
Link Posted: 7/20/2017 4:04:22 PM EDT
[#41]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


We all hate taking the 25% (or whatever) hit, but I'd much rather pay whatever of $18,000 ($24,000 in my case)every year than 35% of a couple mil.  Look at it as a way of budgeting your taxes over your working lifetime rather than your withdrawing lifetime.  Most people don't realize the huge tax liability they have "worked" to build up in their traditional 401(k)s and IRAs.

I just throwing some SWAG #s out, so don't "ARCOM literalize me", but a few decades from now you could be sitting on a couple of million, of which, a few hundred thousand was your contribution.

Which would you rather pay taxes on, a few hundred thou (over 30 or 40 years) or a few million (over 20-30 years)?

IOW, you could have a few million which is mostly yours tax free, or a few million of which, only 75% is yours.  Of course, when you start RMDing a couple hundred thou a year your tax rate will probably be higher than 25%, so two/thirds of it is actually yours.

Contribute the min 401(k) to max company contribution; max the Roth(s) if you can.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:


We all hate taking the 25% (or whatever) hit, but I'd much rather pay whatever of $18,000 ($24,000 in my case)every year than 35% of a couple mil.  Look at it as a way of budgeting your taxes over your working lifetime rather than your withdrawing lifetime.  Most people don't realize the huge tax liability they have "worked" to build up in their traditional 401(k)s and IRAs.

I just throwing some SWAG #s out, so don't "ARCOM literalize me", but a few decades from now you could be sitting on a couple of million, of which, a few hundred thousand was your contribution.

Which would you rather pay taxes on, a few hundred thou (over 30 or 40 years) or a few million (over 20-30 years)?

IOW, you could have a few million which is mostly yours tax free, or a few million of which, only 75% is yours.  Of course, when you start RMDing a couple hundred thou a year your tax rate will probably be higher than 25%, so two/thirds of it is actually yours.

Contribute the min 401(k) to max company contribution; max the Roth(s) if you can.
Quoted:

First, if you're in the 25% tax bracket (look at the link and find the bracket based on your income and filing situation), will you ever actually drop out of it in retirement? For instance, I'm young (27) and in the upper end of the filing single 25% bracket. If I never get married, I'll probably never fall below the 25% bracket even in retirement. In this case, Roth looks good. However, if I get married, I'd still be in the 25% bracket, but now I'm at the low end of the filing jointly 25% bracket. It's conceivable that if I'm married and we go into retirement debt free, that our income will be low enough that we'd drop to the 15% bracket. In this case, I'd pay a lower percentage tax on withdrawals than I did on contributions. However, you need to consider time in the market and doubling your investments every 10 years on average. Then, by 60 I'll have eight times what I had invested by 30. I'd rather pay the 25% on the eighth I invested than the 15% on the whole amount. On the other hand, if I switch to traditional, I could theoretically contribute more into my 401k because it is pre-tax and the money taken out each paycheck for taxes on the Roth could be spent investing in the traditional 401K pre-tax.

Also, if you're truly contributing $10k to a Roth each year, that's actually costing you $13.3k. That's because the the Roth is post-tax at 25% tax rate. 75% of $13.3k gives you $10k to invest post-tax.
You 2 have been around here long enough, and are smart enough. Unless I'm misreading what you're writing, it seems you're both forgetting about the numerous times it's already been pointed out here. For equal taxing rate, Roth vs traditional will come out EXACTLY the same in the end. If the government took the tax money collected from your Roth contributions and invested it exactly as you have, and you total the amount up at retirement they will be exactly equal. The tax RATE is the only difference, the time-period in which the tax is paid DOES NOT CHANGE ANYTHING. The actual tax amount DOES NOT CHANGE ANYTHING. If you don't believe this then sit down with a calculator and run the numbers. The things that DO affect the amount: tax rate, eligibility for tax credits now, tax bracket differences, contribution limits.

With that out of the way, OP, here are some things to consider.

#1 Your current MAGI and how it effects your ability to take tax credits. You have 4 kids, are you able to take the child tax credit? What if you maxed your 401k? Would that change it enough so you could?
#2 Because you're in a certain tax bracket now, and you expect to be in the same bracket at retirement doesn't mean all your income is taxed at that rate. The brackets are scaled. Right now, contributing to a 401k saves tax money at your highest bracket, but in retirement the first $XX,XXX will be taxed at 10%, then a portion at 15%, then the next bracket etc. You have to make up a LOT of ground in the Roth to overcome this effect.
#3 You can "work" Roth vs traditional mixes to your advantage in retirement in regards to working the tax brackets (keep your taxable withdrawals in the 15% and lower bracket and use Roth withdrawals to make up any additional money you need to withdraw) so having a good mix is still advantageous.

IMHO, Roth for when you're making low income, traditional when making high income. My preference is to max 401k first, if that isn't enough start doing a Roth in addition. If that isn't enough and you still wish to do more, and you employer offers it, Roth 401k instead of the traditional 401k (and still doing the private Roth).  I maxed my Roth every year I was in HS & college (busted arse and owned my own business); I haven't put a penny in since that time, I've contributing to my 401k (maxing it some years). If I'm ever up against the 401k max and wish to contribute more, then we'll begin maxing my Roth and my wife's Roth. After that if I still wish to contribute more I'll convert my 401k contributions to Roth 401k (which carries the same max of $18k), which will let me pack away the maximum tax-advantaged retirement I'm legally allowed. I won't have that problem for some time though, I've been buying real-estate.
Link Posted: 7/20/2017 6:39:00 PM EDT
[#42]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I'll give you a bit of different advice. It sounds like you have a great plan to move forward....But where are you moving to? Let me relate a little story.

I have a buddy whos father loved to fish. That was his passion. Fishing. He lived frugally and retired pretty well off. For his retirement present he went out and bought himself some updated fishing gear and got all set to enjoy retirement. My buddy laughed and told his dad "You could have done that years ago...."

OK, story time is over. So how does it apply? Well, what are your retirement goals? You should match your contributions to meet your goals, not just slam as much into retirement as you can. I mean its not a bad idea, but heres a made-up-on-the-spot example.

Lets say you live frugally, dont take big vacations and buy used cars so you can save bunches of money. Then you retire and you realize fuckin hell you have more money than you'll ever spend. Well, you could have trimmed back the contributions decades ago and taken a once a year nice vacation somewhere exotic or bought a news car.

The point is you are looking at it only from how you can change your tax brackets. Might be worth considering where your varying levels of contributions are going to take you....If I had to choose between living frugally and having more than I'd ever need in retirement or living well and having a bit more than I expected in retirement I'd take the latter option.

Worth what you paid for it, and its certainly not suggesting you shouldnt contribute a healthy amount into retirement accounts! That said, I prefer Roth as much as possible because fuck taxes on my retirement income streams.
View Quote
That's a very interesting point.  But how do you know/who is going to tell you when enough is comfortably enough?  99.9% of retirement advise is all "You're going to need more", "Keep piling away more", "'They' are going to take your house and throw you out on the street unless you save more".
      With a constant barrage of media saying there is never enough, it's very hard to get comfortable dialing the savings rate down.
Link Posted: 7/20/2017 8:12:41 PM EDT
[#43]
OK, 2 points....1 for the OP and 1 for UncleGreg

I think a good way to decide if you need to reduce your taxable wages is to see if it would move you to a different tax bracket. If you can increase your 401k contribution and cause you to drop into a different bracket it may be worth it, otherwise I'd just go Roth. I *think* this link might help you with that:

Federal Tax withholding

Regarding how much you need to save thats always a tricky one to answer. The rule of thumb is you need 25x your expenses to retire. As an example, if you calculate that you will need 45,000 a year to retire then you need 25x that saved...ie....$1,125,000. Why? The assumption is you will draw down at 4% from your retirement savings, and 4% of 1.1 mil is....You guessed it. 45,000. 

So the answer to the question of "How much do I need to retire" isnt an easy one to answer but its certainly not impossible. The big decisions are things like do you want a new car every 3 years or a new car every 7? Are you going to buy a mcmansion and make payments or live in a paid off house? European vacation every year or just spend a few weekends at the local beach?

A good thread that actually just popped up can be found here, you'll find some good advice inside.

How much to retire

My point is I think a lot of people overestimate what they need. Now thats not bad, not by a long shot. If you have to miss its a hell of a lot better to miss big than miss small! But at the same time if you can accurately predict what you need and where you are going that might allow you to ease up today and have a bit higher quality of living right now. On the other hand, accurately predicting might also lead you to realize you are going to fall short and allow you to make changes either in how you life today or reset how you intend to live when you retire. 
Link Posted: 7/20/2017 9:06:26 PM EDT
[#44]
My military retirement check is pretty nice.  I could pay off my house with my investments and live on that easily.  Want to have more for the kids and travel (and NFA)
Link Posted: 7/21/2017 5:28:52 AM EDT
[#45]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
<snip.
Lets say you live frugally, dont take big vacations and buy used cars so you can save bunches of money. Then you retire and you realize fuckin hell you have more money than you'll ever spend. Well, you could have trimmed back the contributions decades ago and taken a once a year nice vacation somewhere exotic or bought a news car.<SNIP>
View Quote
Perhaps, but you won't know if you'll actually reach that point until you do, or are at least pretty close.

And once you do, it's a pretty good feeling.  I'm probably there, but the general conservatism in my nature says I'm almost there...I can see the light at the end of the tunnel.
Link Posted: 7/21/2017 6:37:10 AM EDT
[#46]
There are very few scenarios where Traditional nets more than a Roth and Sylvan pointed out one of them (I think):  more money for the children.

If by that he meant an inheritance, then the Roth with no RMDs is one way to do that plus the heir(s) won't owe any taxes on it either.

Another way is if you simply don't need to make withdrawals to pay your living expenses.  Roth = you don't have to withdraw any $ ever if you don't want/need to.  Traditional:  you are required to empty it/them within ~30 years whether you need the $ or not.  After all, the IRS wants all that tax $ you didn't pay over the last few decades.

Back to the scenarios where Traditional will net more than Roth, and both are fairly contrived:

1.  If you have a very high tax rate while working and expect a very low tax rate while retired, Traditional wins.  Contrived because think about the conditions you just stated:  very high tax rate while working = you're making a lot of $ so should have fairly substantial investments, IRAs, 401(k)s, etc. and a very low tax rate while retired = what happened to all of the $ you earned while working???  The premise for this scenario just doesn't make sense.  If one has the same or higher tax rate in retirement (as I will) the Roth (easily) wins.

2.  It also requires one to actually invest the $ saved on taxes rather than spending, saving, etc. it and have your tax rate end up lower upon retirement; if those two conditions aren't met, Roth wins (again).  One would have to have the discipline (if they weren't already investing investing outside of their Traditional accounts) to determine how much they would have paid in taxes and invest at least that much in a taxable account.  Few probably actually do that.

The only time Traditional can be considered "better" is when the investor actually needs the funds saved on taxes to pay for living expenses.

If one looks at what one is actually doing when saving for retirement it is this:

You spend 35-40 years working, saving and investing in order to establish a fund from which you can withdraw over next 20-? year span from when you stop working until you die.

Traditional (tax deferred) instruments work in reverse with respect to taxation:  you spend your 35-40 working years building up a tax liability which you or your heir(s) must then pay (back) over the next 20-? years (or longer in the case of your heirs, but they will pay it).

Another way of looking at it.  There is a big difference between:

1.  Investing a sum and then paying taxes on the entirety of the principle and earnings when withdrawn versus

2.  Paying taxes on the principle as it is invested and never paying taxes on principle nor the earnings when withdrawn.

Personal examples:

Between his pension, social security and his RMDs, my father's tax rate increased as he progressed through retirement.

Then guess what?  I inherited his IRA (100% traditional [rolled over 401(k)] and now I'm paying an even higher tax rate on the RMDs I'm now required to take from it.  I'm sure that if he had realized that was going to happen he would have made more than his RMDs (enough to push him just below the next bracket).  While heirs must still take RMDs from an inherited Roth IRA, at least they won't owe taxes on them.

Finally, he made another financial maneuver which benefited me more than him:  he "rolled over" a large percentage of his RMDs into annuities so that the funds (less taxes) could continue to grow tax free.  While I will end up owing taxes on the earnings when I harvest them, the principle is tax free (since he already paid the taxes on that).

And since we banged on life insurance which, I agree, is typically a bad investment, it's not necessarily a bad thing to have.  With respect to taxes and heirs, no taxes due.

If you know you have enough for you heir(s) to make it no matter what w/o life insurance, yea, probably not necessary.
Link Posted: 7/21/2017 1:43:12 PM EDT
[#47]
I personally contribute into my traditional 401k to reduce our AGI in order to reduce the 25% tax bracket liability and qualify for the Child Tax Credit. All of our IRA contributions are typically ROTH, but we try to do traditional IRA contributions if it can also help reduce AGI. Of course this strategy is betting on our retirement tax liability to be less than it is now. I'm comfortable with that bet.
Link Posted: 7/21/2017 2:29:44 PM EDT
[#48]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I personally contribute into my traditional 401k to reduce our AGI in order to reduce the 25% tax bracket liability and qualify for the Child Tax Credit. All of our IRA contributions are typically ROTH, but we try to do traditional IRA contributions if it can also help reduce AGI. Of course this strategy is betting on our retirement tax liability to be less than it is now. I'm comfortable with that bet.
View Quote
I'm bloody bad at calculating taxes, so throw me a bone if ya would. 

Based on the link above for Tax Brackets, and to make the example easy lets use the second chart for a married person. This means that you are trying to avoid the bracket in red below?

OverBut not overof excess over
$ 360$ 1,138. . . . 10%$ 360
$ 1,138$ 3,523. . . .$    77.80 plus 15%$ 1,138
$ 3,523$ 6,740. . . .$   435.55 plus 25%$ 3,523
So to sum you use the 401K to bring your income below $3523 (Based on this chart, obviously it may be entirely different for your situation)
Link Posted: 7/21/2017 5:24:15 PM EDT
[#49]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I'm bloody bad at calculating taxes, so throw me a bone if ya would. 

Based on the link above for Tax Brackets, and to make the example easy lets use the second chart for a married person. This means that you are trying to avoid the bracket in red below?

OverBut not overof excess over
$ 360$ 1,138. . . . 10%$ 360
$ 1,138$ 3,523. . . .$    77.80 plus 15%$ 1,138
$ 3,523$ 6,740. . . .$   435.55 plus 25%$ 3,523
So to sum you use the 401K to bring your income below $3523 (Based on this chart, obviously it may be entirely different for your situation)
View Quote
Yep, that's the idea. However, we can't get below the 25% bracket even when maxing out traditional 401k, so we just get in the range where we can get the child tax credit. Our income varies each year due to overtime fluctuations, so it's possible we can deduct traditional IRA contributions some tax years.
Link Posted: 7/22/2017 2:31:40 PM EDT
[#50]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

Back to the scenarios where Traditional will net more than Roth, and both are fairly contrived:

1.  If you have a very high tax rate while working and expect a very low tax rate while retired, Traditional wins.  Contrived because think about the conditions you just stated:  very high tax rate while working = you're making a lot of $ so should have fairly substantial investments, IRAs, 401(k)s, etc. and a very low tax rate while retired = what happened to all of the $ you earned while working???  The premise for this scenario just doesn't make sense.  If one has the same or higher tax rate in retirement (as I will) the Roth (easily) wins.
View Quote
I know you understand how the tax brackets work, but for those that don't understand I'm going to repeat this with more detail added. First and foremost, this is all predicated on the fact that we ONLY know what the tax structure is like today, so for purposes of calculations I'm ignoring inflation etc, and using only the current tax bracket structure. There is no way to predict what taxes will be when we retire.

If you're making $100k today (assuming married for the purpose of tax brackets), and you're trying to decide Roth vs traditional, the money you put into a Roth will be taxed at 25%. If, instead, you put it into a traditional, it will grow, and you will then be required to take a RMD. Lets say your distribution is 50k. Your distribution will be taxed 10% on the first $18,650, 15% on the remaining $31,350, giving an adjusted tax rate of 13.3%, nearly half the tax rate you would have paid for a Roth. Remember, for equal tax rates the come out EXACTLY the same (example below). So lets compare the scenario where you're in the same tax-bracket, actually lets say you distribution is exactly the same in retirement as it was when you made the $100k. For the Roth you paid 25% tax rate prior to investing in the Roth. For the traditional you pay 10% for the first $18,650, 15% for the next $57,250, & 25% for the remaining $24,100, giving an adjusted tax rate of 16.5%, still VERY much below the 25% you would have paid for a Roth.

Your post indicates to me that you haven't actually run the numbers. You're still emphasizing that the "gains grow tax free" in a Roth. Do the number on that and get back to me. It's absolutely UNTRUE. While the "gains" do grow tax-free, the gains were decreased from the start because of the taxes paid on the Roth. By retirement the Roth balance (invested equally, and taxed at the exact same rate at distribution) will only catch up to the traditional after the taxes are taken.

Just to reiterate, for equal adjusted tax rates, there is no difference. For this example we will use the tax rate of 10% (it could be any number, the example will show the same end-result). This example ignore all other taxes except the income-tax and assumes an 8% ROR (compounded annually) and retire at 30 yrs.

Joe has $6,000 (pre-tax) that he is trying to decide which way to go. If he takes it as taxable income and goes the Roth route he will be left with $5400 in his Roth. OTOH, if he goes with the traditional he has $6,000 in the account.
Year......Roth.......Trad
0...........5400......6000
5...........7934......8816
10.........11658....12954
15.........17130....19033
20.........25169....27966
25.........36982....41091
30.........54338....60376
after tax54338....54338

Now figure in that not all of the $60,376 is taxed at 25% and you will find that it takes a pretty significant tax-rate difference (pre-retirement vs post-retirement) before the Roth beats the traditional. Couple that with potential other tax benefits now, it's hard to justify the Roth IRA for a middle-class working family.

ETA, that being said, if you wish to live with your head in the sand, and believe the "Roth is tax-free growth" BS that so many people parrot in ignorance, without running the numbers for yourself, be my guest. You're only hurting yourself.
Arrow Left Previous Page
Page / 2
Close Join Our Mail List to Stay Up To Date! Win a FREE Membership!

Sign up for the ARFCOM weekly newsletter and be entered to win a free ARFCOM membership. One new winner* is announced every week!

You will receive an email every Friday morning featuring the latest chatter from the hottest topics, breaking news surrounding legislation, as well as exclusive deals only available to ARFCOM email subscribers.


By signing up you agree to our User Agreement. *Must have a registered ARFCOM account to win.
Top Top